The U.S. Economy, 2007 – Today: Collapse, Stimulus, Austerity, “Recovery” Robert Pollin Department of Economics and Political Economy Research Institute (PERI) University of Massachusetts-Amherst November 3, 2015

Wall Street Hyper-speculation Caused the Great Recession Erosion of financial regulations over decades and formal repeal in 1998 led to massive bubble in U.S. housing market – Collapse of housing bubble was proximate cause of financial crisis and recession

Collapse of U.S. Household Wealth

Financial Market Collapse Transmitted to Real Economy Transmission begins immediately in U.S. economy, then moves to Europe

Fall of U.S. Macro Indicators Sources: U.S. Bureau of Labor Statistics; OECD Statistics U.S. GDPU.S. Unemployment Narrow unemployment Broad unemployment 2007$14.9 Trillion4.6%8.8 (December) 2009$14.4 Trillion9.3%17.1 (December) Change from % GDP Decline+ 4.7% rise in narrow unemployment +8.3% rise in broad unemployment

Initial Response to Crisis: Large-Scale Countercyclical Interventions Three types of countercyclical interventions: – Fiscal Deficit Spending – Monetary Stimulus Targeting short-term interest rates Targeting long-term interest rates – Financial sector bailouts

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Federal Funds Rate After Crisis: Unprecedented Zero Interest Rate Policy 8

Financial Market Bailouts U.S. Treasury Bailout of Banks – $800 billion Federal Reserve Bailout of Banks and Money Market – $2-3 trillion

Bailout Operations Did Not Produce Immediate Recovery (of course) Shift in Priorities: – In mainstream circles, fundamental problem quickly becomes government debt, as opposed to mass unemployment, social crises Ascendency of Austerity Hawks

Austerity Hawks as Variant on Neoliberalism Stimulus policies will create inflation and rising interest rates “Ricardian Equivalence” – Stimulus policies are always ineffective—R. Barro Public debt > 90% of GDP = growth collapse – Reinhart/Rogoff Austerity policies will be stimulus – Alberto Alisina—”confidence fairy” Capitalist economies are self-adjusting – Pigou effect/labor market flexibility

Government Debt Grew but Interest Payments on Debt Reached Historic Lows 12

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No Rise in Inflation and Interest Rates 14

But Weak Recovery 1: GDP Growth

Weak Recovery 2: Unemployment

Business Borrowing Rate Does Not Fall with Federal Funds Rate 17

Credit Flows to Small Business Remains Weak 18

Banks are Borrowing at Zero Interest Rate and Hoarding Cash 19

U.S. Economy at Present Official unemployment down to 5.1%, but: – Including underemployed, labor market drop-outs, around 13% Wage stagnation and rising inequality – Top 1% received 91% of all income gains since 2009 Attack on Public Sector – Cuts in social services—food security cut for 47 million – Cut public sector worker wages – Attacks on public sector unions – Enable states to declare bankruptcy on public pension funds—Jeb Bush “Recovery “ as Neoliberal Restoration

Alternatives to Austerity: Egalitarian Full Employment Agenda “People’s Quantitative Easing” Funding public investments through central bank municipal bond purchases – “Pulling on a String” – Employment expansion-1 Restore State and Municipal Government Spending: – Employment expansion--2 “Robin Hood” Financial Market Taxes Living Wages Green Growth